Category Archives: Scienter

On September 22, 2014, the Second Circuit issued a decision in Weiss v. National Westminster Bank PLC, No. 13-1618-CV, discussing the scienter required to state a claim for providing “material support and resources to a terrorist organization in violation of the Antiterrorism Act.”

In Weiss, the EDNY dismissed a an Antiterrorism Act claim, holding that such a claim requires knowing support of terrorist activities. The Second Circuit reversed, explaining:

While § 2333(a) does not include a mental state requirement on its face, it incorporates the knowledge requirement from § 2339B(a)(1), which prohibits the knowing provision of any material support to terrorist organizations without regard to the types of activities supported. . . .

Thus, to fulfill § 2339B(a)(1)’s scienter requirement, incorporated into § 2333(a), Plaintiffs must show that [the defendant] both knew that it was providing material support to Interpal and knew that Interpal engaged in terrorist activity. Section 2339B(a)(1) does not require a showing that NatWest knew it was providing material support for terrorist activity.

(Internal quotations and citations omitted) (emphasis added). The Second Circuit went on to explain that:

For the purposes of § 2339B(a)(1), a defendant has knowledge that an organization engages in terrorist activity if the defendant has actual knowledge of such activity or if the defendant exhibited deliberate indifference to whether the organization engages in such activity. . . . . Section 2339B(a)(1) explicitly incorporates the meaning of “engage in terrorist activity” from § 212(a)(3)(B) of the Immigration and Nationality Act, 8 U.S.C. § 1182(a)(3)(B)(iv)(IV), which defines “engage in terrorist activity” to include soliciting funds or other things of value for a terrorist organization described in clause (vi)(I). Clause (vi)(I) defines “terrorist organization” to mean an organization designated under section 1189 of this title, and § 1189 authorizes the Secretary of State to designate an organization as a foreign terrorist organization (“FTO”).

(Internal quotations and citations omitted) (emphasis added). Because Interpal was alleged to have “solicited funds for Hamas,” which has been designated as a terrorist organization, “Interpal engaged in terrorist activity within the meaning of Section 212(a)(3)(B) of the Immigration and Nationality Act.” To prevail, the plaintiff thus had to show that the defendant”provided material support to Interpal while having knowledge that, or exhibiting deliberate indifference to whether, Interpal solicited funds or other things of value for Hamas, regardless of whether those funds were used for terrorist or non-terrorist activities.”

Like this:

In In re Gentiva Securities Litigation, 10 CV 5064 (E.D.N.Y. Dec. 10, 2013), two individual defendants and the defendant corporation moved for reconsideration of Judge Arthur D. Spatt’s order denying their motion to dismiss federal securities claims. The case is a class action alleging that Gentiva, a health care provider, artificially inflated its stock price through a scheme that involved ordering unnecessary medical care for clients, and then billing the federal government for these illegitimate expenses. At issue was whether the plaintiff class had properly pleaded scienter.

One of the individuals, Potapchuck, asserted that the claims against him did not meet Section 10(b)’s scienter requirement because he sold his shares pursuant to a “10b5-1 plan,” under which shares are divested at predetermined times. Potapchuck pointed out that he sold only 12% of his shares, if the 10b5-1 trades were disregarded. That fact made the difference on reconsideration. After commenting that “Defendants should have specifically quantified the number of 10b5-1 [trades] in their prior motions to dismiss, rather than relying on the Court to comb through the Defendants’ financial records,” the Court found that the relatively small amounts at issue—just 12% of Potapchuck’s shares, resulting in $300,000 in net profits—did not support an inference of scienter. The Court reached a different result regarding the other individual defendant, Malone, who sold 99% of his shares during the class period for approximately $2.14 million (and none pursuant to 10b5-1 plans). Those trades were sufficient to plead scienter against Malone.

The fact that only one corporate insider engaged in allegedly suspicious sales caused the Court to change its mind about the Section 10(b) claim against Gentiva as well, which was dismissed on the ground that an inference of its fraudulent intent could not be shown. Thus, the Court reversed course on reconsideration and dismissed two of the three defendants, while upholding claims against the third.